US Dollar tumbles against euro on spike in Bund yields

Frankfurt (May 12)  The U.S. dollar slumped against the euro and Swiss franc on Tuesday after a spike higher in German Bund yields overshadowed a similar rise in U.S. Treasury yields and generated demand for the European currencies.

German 10-year Bund yields shot up 22 basis points from Monday's session low of 0.52 percent to a session high of 0.74 percent on Tuesday. While benchmark 10-year U.S. Treasury yields hit six-month highs of 2.37 percent, analysts said traders were more alarmed by the move in Bund yields.

The European Central Bank's 1 trillion-euro stimulus program had driven European rates lower, with German 10-year Bund yields threatening to slip into negative territory as recently as last month after hitting a record low of 0.05 percent on April 17.

"There are serious questions about how effective the ECB's quantitative easing program is going to be in getting rates lower and keeping them lower," said Joseph Trevisani, chief market strategist at WorldWideMarkets in Woodcliff Lake, New Jersey.

While the euro was last up 0.65 percent against the dollar at $1.1218 and was set for its first session of gains in four against the greenback, it remained within recent ranges and was below a more than two-month peak of $1.1392 touched on Thursday.

The ECB's burst of monetary stimulus has contrasted with expectations that the Federal Reserve will raise interest rates this year, helping drive a nearly year-long rally in the dollar against a basket of major currencies. Fed rate hikes are expected to boost the dollar by driving investment flows into the United States.

The dollar was down 0.3 percent against the Japanese yen at 119.81 yen. Analysts said the yen had been range-bound against the dollar because of a lack of major developments in monetary policy from the Bank of Japan.

Analysts said the dollar would resume its rally once the Fed moves closer to hiking rates.

"This looks to be a corrective phase we're in right now," said currency strategist Eric Viloria of Wells Fargo Securities in New York. "The broader trend looks still intact, and we would expect the dollar to resume its strengthening."

The dollar was last down 0.66 percent against the Swiss franc at 0.9286 franc. The dollar index, which measures the greenback against a basket of six major currencies, was down 0.5 percent at 94.54.

Source: CNBC